Stabilizing monetary systems: sterling's currency and credit markets from the 12th to the 21st C

This paper seeks to highlight a design feature of monetary systems that was prevalent from medieval times until the 20th century, but has since fallen into abeyance. The lost piece of functionality in modern monetary systems is a mechanism for stabilizing the value of assets that form the main counterpart of money, without giving rise to perverse incentive effects. Understanding how this mechanism works is confused by the many guises taken by money and its credit counterparts around the world, and the radical changes in their form over the centuries. This paper seeks to illustrate the stabilization mechanism by presenting an analytical history of sterling’s currency and credit markets from the 12th C to the present day. For the purposes of this study, the methods used to stabilize the value of banking assets are examined with reference to four types of banking institution: the Royal Mint, the Bank of England, clearing banks and building societies. The stability of these four is then contrasted with the predicament of the retail and shadow banks of the post-1980 era. The paper concludes that policymakers should pay more attention to stabilizing the value of bank collateral.